2 Airlines Flying High -- and 1 Jeans Company?

Not many years ago, Wall Street legend Warren Buffett described the airline industry as "a death trap for investors." Seems that times have changed. Now, he invests in many of them, and their business models look solid. On Wednesday, for example, Delta Air Lines (NYSE: DAL) -- the world's second-largest passenger airline -- reported its first-quarter results before the market opened, and there was plenty about them to like, including its best-ever top-line result. And investors looking elsewhere in the industry for good news were pleased by the rumors that popular budget carrier JetBlue (NASDAQ: JBLU) was preparing to announce its first trans-Atlantic routes.

In this MarketFoolery podcast, host Chris Hill and senior analyst Emily Flippen put the two airlines' situations in context for investors. And they check in on a strong player in a different, oft-troubled industry: Levi Strauss (NYSE: LEVI). The jeans giant delivered its first post-IPO earnings report, and the results gave its stock another push into a valuation range that's rather rarified for a company in the apparel business. And they close with a discussion about a stock that Flippen is keeping an eye on now, as earnings season's about to get underway: software-as-a-service dynamo Atlassian (NASDAQ: TEAM).

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This video was recorded on April 10, 2019.

Chris Hill: It's Wednesday, April 10th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, the one and only Emily Flippen. Thanks for being here!

Emily Flippen: Thanks for having me!

Hill: Happy Wednesday!

Flippen: [whispering] Happy Wednesday!

Hill: [laughs] [whispers] Why are we whispering?

Flippen: [laughs] Hump day!

Hill: So, earnings season really starts to -- I don't want to say kick into high gear, but it definitely starts to heat up next week. But we do have some earnings this morning. We've got airlines. Amazingly, we have Levi Strauss reporting earnings. We'll get to that.

Let's start with Delta, though. Delta Air Lines reported record revenue in the first quarter. Strong profits. They look like they're doing a good job on holding the line on expenses. You tell me, was there anything of note to be worried about with Delta? This looked like a really strong report.

Flippen: Yeah, great report from Delta. Not completely unexpected, because last week they did raise revenue guidance, citing healthy demand. The company beat on both revenue and earnings, actually recognizing record-high revenue at $10.4 billion. But, that's still only about a 7.5% increase year over year, which is small, I think, for the economy that we're in right now, but significant for the airline industry as a whole. Delta shareholders are definitely happy today.

There are a few things of note to me. The first was that part of their improved guidance was because oil prices weren't as high as they were expecting, which is really saying something. Oil prices have definitely shot up. It makes you wonder what Delta management was expecting here.

Hill: Yeah, I saw that, too. I had the exact same reaction. It was like, "Wait, how high were you expecting oil to go, that this is lower than what you were expecting?" But, look, if they're being super conservative in terms of that what they think the price of oil is going to be, good for them. Again, they're doing a good job holding the line on expenses. That's obviously a huge expense for any airline.

Flippen: It is. They also didn't have any of the 737 Max planes. A lot of that controversy that we saw earlier this quarter that affected a lot of other airlines, including American Airlines, Delta was relatively shielded from that. I don't think it makes a material difference, really, over the long term. But it's definitely helped over the short term.

Hill: Yeah. I think we mentioned this on a previous episode, we always have expectations when we go into earnings season. Some of them have to do with the macroeconomic environment. Some of them are industry-specific. I think we said a couple of weeks ago on this show, expect absolutely every airline reporting earnings to either proactively talk about Boeing or immediately be asked on the conference call about Boeing.

Flippen: Oh, of course. And I'll tell you what, it will be interesting to see if this changes the Buffett view about Delta at all. There's been a lot of word about whether or not Delta would be the next Buffett acquisition, a lot of controversy around that potential. It's a cyclical industry, but Delta is doing well. It's definitely one of the better-managed airlines. I'm interested to see if we see any Buffett buying in the future.

Hill: We have one other airline to get to. But real quick, when you look at Delta's stock, it's not moving a whole lot today, but as you said, they had recently raised guidance. Year to date, it's up 14-15%. It's had a pretty decent lift recently. Does it look expensive to you?

Flippen: It doesn't look expensive to me for the reports that we're seeing today. What does worry me is, like I mentioned before, this is a cyclical business. When times are good, times are good. But when times are bad, times are bad. The price that investors are willing to pay today is probably higher than the price that they're going to pay when the economy starts to contract. And that's a when, not an if. The rising price of oil does have me a little bit concerned. Who knows how long that will last? And, a general economic pullback will definitely hurt companies like Delta.

Hill: JetBlue is going to report their earnings in two weeks, but shares of JetBlue are up about 4% this morning on reports that they're getting ready to announce the start of trans-Atlantic service. As someone who flies JetBlue a decent amount when I'm heading north -- it's very convenient to go from DCA up to Boston on JetBlue. I enjoy their service a great deal. I saw this report, and I just thought: "OK, great! One more competitor in trans-Atlantic service? Yes, please!"

Flippen: JetBlue has been trying to do this for a while now. They've been talking about setting up trans-Atlantic service for years. It seems like it might be coming in the next couple of days, that announcement. I think the timing of it is really interesting, not only just because it's been so great for airlines recently, but also because we see a lot of competitors that are flying the trans-Atlantic routes get squeezed. Most recently, WOW Airlines, which is a discount Icelandic airline, went out of business. They shut down operations completely. They were mainly just a transit company, flying from the Southeast U.S. to key European cities. So, there's a competition that's decreasing in that area. Having a competitor like JetBlue come in means not only good things for JetBlue, but great things for consumers as well, because hopefully that means we'll be able to get cheaper flights here in the short term.

Hill: Yeah. And for anyone who missed that story, that was both surprising and a little bizarre, when WOW shut down their airline. They did so very suddenly, and stranded a ton of people who were expecting to get on flights. If you've flown enough times, you've been in the situation where you're waiting at your gate and there's a delay or there's a maintenance issue, or maybe even your flight's been canceled. I've never been in position, "We have some bad news, folks: The airline has completely gone out of business."

Flippen: I was having a conversation with David Gardner, actually, recently on a Rule Breaker Investing podcast --

Hill: Name-dropper.

Flippen: [laughs] We talked about JetBlue. He quizzed me over the market cap. I had no idea about the size of JetBlue. I guessed it had a $1.5 billion market cap. That is horribly under what JetBlue's market cap is. And he said to me, "I hope you're never flying an airline that has a $1.5 billion market cap." And I immediately thought to myself, "Well, I just got back from a trip right through WOW and Wizz Air, both of which I expect to have market caps probably around that size." So, it was interesting to me. If you do see airlines go out a business, especially in troubled times, having issues with oil prices or controversies around airplanes, it's these smaller companies that are the ones that are taking the brunt of the force.

Hill: Just a few weeks ago, Levi Strauss went public. This morning, Levi's came out with their first earnings report. First-quarter revenue came in 7% higher than a year ago. You looked at the report, what'd you think?

Flippen: I was surprised, I'm not going to lie. I was a little bit skeptical when Levi's went public. I immediately thought, this is going to be a short-term pop situation, and then people are going to remember that they sell jeans.

Hill: [laughs] They're not bad!

Flippen: They're not bad jeans, not at all. And it's not a poorly managed company at all. But ultimately, they're still a clothing retailer. We've seen the market really punish these types of businesses over the past few years. So, 7% revenue growth was much better than I personally expected. The company reiterated their previous guidance.

But if I'm honest, I'm still not excited about 7% revenue growth. Maybe that's because I invest more in high-growth companies. But at the price that they're trading at today, it's clear that people expect great things from Levi's. That's not to say that they won't be able to deliver on them. Because 7% revenue growth, like I said, for this industry, is amazing. But it is to say that the expectations are high. There's not a lot of room for Levi's to trip up here.

Hill: Let's go back to market caps for a second. JetBlue has a market cap of around $5 billion. Levi's goes public at $17 a share on opening day, it pops to $22. It's up a little bit on this report. I think now it's $23 a share. It has a market cap of $9 billion. And that's the thing that I focus on when I look at this. Again, they make a good product. They do a good job managing this business. It's hard for me to say that I really like this stock where it is because I look at them and just think, "You've just come public, it's a $9 billion valuation, which really seems pricey to me." This is absolutely an example of, I want to see a couple of more quarters of them in the public markets before I put this stock on my watchlist.

Flippen: Exactly. I'd want to see their ability to continue to deliver on those types of numbers. Right now, they're trading for a price of sales of about 7 times. Essentially, if you buy the stock today, you're paying a price that is 7 times the sales per share that the company has. That's significant because the average in the industry is less than 1 for clothing retailers. That's not to say, like I said, that Levi's is average. Admittedly, it's probably a company that does deserve a bit of a premium. If any clothier has growth ahead of it, it's Levi's. But it's not to say that it's a cheap company at this point.

Hill: Well, and you look at the apparel retail space, pretty much every company at some point in time has put together a good 12 months. And by a good 12 months, I mean a 12-month span where shareholders were rewarded. Whatever the long-term performance of companies like Gap or American Eagle or Abercrombie & Fitch, you can find a one-year period where, boy, that was a great time to own that stock. But over the long term, it's a really tough business. It's hard to feel like any of those stocks are ones that you would not have on a short leash.

Flippen: Yeah, exactly. But every single time I've made that comment, those companies have turned around and performed wonderfully. So I've become a little bit hesitant in feeling confident about the cyclicality of certain industries, retail being one of them.

Hill: Two quick things before we wrap up today. One, it was this day four years ago, 2015 -- and by this day, I don't mean the 10th. I mean the day before the Masters tournament started, that Jason Moser was on the show. Those who know Jason know that he's a great analyst, a great host of Industry Focus, and he's a golf nut. So, four years ago, I said, "Who should I be watching in the Masters?" And he said: "Jordan Spieth. That's the guy. That's the guy I'm watching." And sure enough, Jordan Spieth went on to win the Masters that year.

So I just pinged Jason on Slack. I said, "Hey, I know you're not in the studio today, but just give me something." He said: "Rory McIlroy. This is the year that Rory McIlroy is going to get it done." So, for the golf fans out there, there you go. There's a little something from Jason Moser.

As I mentioned, earnings season starts to heat up next week. It's also spring break, so I'm not going to be here. I'll be in Santa Fe, New Mexico. But don't worry. Mac Greer is going to take good care of the dozens of listeners.

What are you watching this earnings season? I always like to go into earnings season with several ideas in mind. One of them is always, what's the company or the industry that I'm the most curious about? And by that I mean, I want to see what they do, because I'm not really sure what they're going to do.

Flippen: Next week, we have some big names reporting like Netflix and Intuitive Surgical. But the company that I'm actually the most excited about is a company called Atlassian. Maybe that's not exactly a household name for people who don't spend all their time looking at SaaS companies. But Atlassian is a software provider of collaboration improvement services, you could say. They make products like Jira and Trello.

What's really interesting is that we've seen, like you said, this entire industry of SaaS companies posting amazing growth. 2018 was an extremely impressive year for a lot of the software companies. 2019, I think it's going to be interesting to see if these companies can keep up the importance of the software that they're providing, or if they're maybe just a short-term fad within companies. I'm excited to see what they report. Expectations, again, are high. I think they're expecting a revenue increase of about 36%, which is down from 40% last quarter, but not down a lot. 36%, like I said, is significant, especially when you're comparing to something like Levi's, at 7%. But, they're still losing money. These companies, it's fun to watch the earnings report because they're growing so well, they're so well run, so well managed, doing great things, but not posting at least not accounting profits. So, I keep my eye on them. At some point, those tides are going to change.

Hill: And this is not ever a reason to buy a stock. But Atlassian does have one of the more fun ticker symbols.

Flippen: It does, TEAM.

Hill: Emily Flippen, thanks for being here!

Flippen: Thanks for having me!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

Chris Hill has no position in any of the stocks mentioned. Emily Flippen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Atlassian, Delta Air Lines, Intuitive Surgical, and Netflix. The Motley Fool recommends JetBlue Airways. The Motley Fool has a disclosure policy.